S&P Says China May Be Spending Too Much

S&P Says China Spending Puts Economy Most at Risk

Lifting weights is good for building muscle, but too much of the exercise can cause a body to break down. The same goes for an economy when it comes to investment spending.

Standard & Poor’s economists think they have come up with a shortcut to determine whether an economy is spending too much, ranking economies based on their vulnerability to an investment-led economic collapse.

Topping the list of economies to worry about, S&P says, is China, where outlays on things like infrastructure, factories and housing account for more than 40% of the economy.

Investment spending helps boost economic growth in the short term and can also help in the long term–if it increases productivity. Examples would include building roads that reduce travel times between a factory and a port or a school that prepares students for the workforce.

An extreme example of an unproductive project might be a toll bridge with no cars or a hospital with only a few patients. When such projects go into the red, people will eventually stop investing in new ones, leading to an economic crunch.

“The level of a country’s investment overhang can be a leading indicator of a potential economic correction,” S&P says.

It compares investment spending as a percentage of GDP to real GDP and adjusts the two measures in a way that makes it possible to rank fast- vs. slow-moving economies in terms of risk.

China is the only country of 32 examined in S&P’s study to be in the high-risk category.

Countries with an intermediate level of risk include Brazil, Australia, Indonesia and South Africa, which have all invested heavily in recent years to supply China’s natural resource needs.

At the low end of the risk scale are the U.S., Taiwan and Germany, where investment has been low or at sustainable levels.

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